Zell REITs lead, General Growth lags local real estate stocks

(Crain's) — Equity LifeStyle Properties Inc., Sam Zell's mobile-home park company, is hot, while mall owner General Growth Properties Inc. is not in a volatile year for local real estate stocks.

Shares in Equity LifeStyle have returned 21% this year as of Friday's close, leading a pack of seven Chicago-based real estate investment trusts (REITs) whose stock has gyrated with the ups and downs of the federal debt-reduction debate and the European financial crisis.

While it has been a good year for housing-related stocks — shares in another Zell-led company, apartment owner Equity Residential, have returned 14.6% — it has been a rougher ride for the area's two retail REITs. Shares in Chicago-based General Growth, whose shopping malls include Water Tower Place on Michigan Avenue, have returned -4.1%, and shares in Inland Real Estate Corp., an Oak Brook-based owner of Midwestern strip malls, have returned -12.4%.

The divergence reflects investors' enthusiasm for rental housing as falling home prices, the foreclosure crisis and a lack of mortgage credit push more people out of single-family homes or condominiums. Some are opting for apartments, while others are moving into mobile homes.

“They can't get that big house in the suburbs that perhaps they never could have afforded, and they are returning to that manufactured-home product,” says Paul Adornato, a REIT analyst at BMO Capital Markets in New York.

Boosting Equity LifeStyle's shares further was the company's recent $1.4-billion acquisition of a mobile-home park portfolio from Hometown America LLC, a Chicago-based competitor, analysts say. Mr. Zell is chairman of Equity LifeStyle, the largest mobile-home park owner in the country, with 375 communities in 32 states and British Columbia. The firm makes money by renting home sites and, in many cases, the homes themselves.

The REIT got a good price on the Hometown portfolio, a deal that allowed the company to expand its portfolio in markets with good growth prospects, analysts say.

As a whole, local REITs have performed well this year: Including dividends, an index of the seven local exchange-listed REITs rose 8.3%, according to SNL Financial LC, a Charlottesville, Va.-based data provider. The Standard & Poor's 500 Index has returned less than 2%.

REITs are benefitting from an improving real estate market, though occupancies and rents remain below pre-recession levels. Demand for space is coming back, albeit slowly, and development has been restrained, limiting the supply of new space.

Yet the area's two retail REITs have disappointed investors this year. Consumer spending, and its impact on retail property, remain concerns amid the sluggish economy, and REITs like Inland have suffered as big retailers like Borders Group Inc. have closed stores or gone out of business.

Geography is also working against Inland, which owns 159 properties mainly in the Midwest.

“It's in the industrial Rust Belt heartland, where you're not going to get a lot of growth,” Mr. Pratt says.

Still, Inland's shares are so low that they offer an attractive dividend yield of 7.8%, says Mr. Adornato. Mr. Pratt, whose firm owns Inland shares, also says the stock is trading at a 25% discount to the net market value of the company's property, a buying signal.

General Growth, meanwhile, has survived a near-death experience, emerging from Chapter 11 protection a year ago. But the REIT, the nation's second-largest owner of regional shopping malls, has failed to impress investors with a recent plan to spin off a portfolio of lower-quality malls.

General Growth has also lagged its rivals on key performance measures, including growth in same-store sales and net operating income, Mr. Pratt says.

“They are not able to put up the kind of numbers that (Macerich Co., Simon Property Group Inc. and Taubman Centers Inc.) are putting up,” he says.